A short-seller you've never heard of has been quietly killing it

Ben Axler, the founder of Spruce Point Capital
Spruce Point Capital
You've probably never heard of Ben Axler, a short-seller who's been building an impressive track record online for spotting corporate frauds.

Short-sellers bet that a stock will decline. They profit from this view by borrowing shares (at a small cost) and selling them at a high price. The idea is that, once the share price falls, the investor can buy them back cheaper and pocket the difference.

Axler, the founder of a small New York-based long/short hedge fund called Spruce Point Capital, is among a group of so-called "activist short-sellers" who research their targets, take a position, and publish their findings online and through social media.

There are many folks on the internet who write about the pump and dump penny stocks. Axler, however, tends to focus on companies around the world with a $1 billion-plus market cap.

"Ben is a great forensic detective," one person in the industry, who wished to remain anonymous, commented. "He's establishing himself as a preeminent forensic detective that puts out extremely well-researched, really concrete short ideas and isn't afraid to call it how he sees it."

The fund he manages is small, with less than $25 million in assets. It is basically just Axler at the helm. Not every one of his calls is a sure-fire hit, either. Of the last 10 companies he has published negative research on, just two are trading at around the same price now as when Spruce Point published the research.

The fund gained more than 20% last year, and is up over 6% through mid-March, according to Axler.

Andrew Left, Citron Research
Screenshot, CNBC
Still, Axler is at the vanguard of a particular kind of Wall Street community, a part of the market where opinionated, direct and social-media outsiders share their ideas with other short-sellers and the public, sometimes having a significant real-world impact.

This group of vocal short-sellers— think Andrew Left and Carson Block—can at times dominate a news cycle, doing battle with corporate management.

Since beginning his career in short selling, Spruce Point's campaigns have resulted in nine CFO and five CEO resignations or reassignments, according to Axler. A couple of his target companies have ended up being delisted or having their registration revoked with the Securities and Exchange Commission.

Top of the rankings

Just last week, SumZero, an online community of buy-side professionals, published rankings of its users naming him the the No. 1 short-seller of the site's 12,000 members.

So far, he's submitted 30 ideas to SumZero. His top short pitch was James River Coal Company, with a return of 99.92%. The company ended up filing for chapter 11 bankruptcy. His other top shorts featured on SumZero include United States Antimony Corporation, which fell 91.84%, and China Integrated Energy, which fell 88.47% and was delisted.

A customer enters the Aeropostale store in Broomfield
Thomson Reuters
He was also the only user on SumZero to recommend Aeropostale as a short. Meanwhile, 16 analysts recommended Aeropostale as a long. The stock now trades at around $0.21 per share.

Axler garnered more attention this month at a conference when he publicly presented his newest target, Planet Fitness, which he's called a "glorified equipment reseller." The stock fell 10% the day that Axler revealed his thesis.

From i-banker to short-seller

Before getting into the short selling business, Axler spent his career as an investment banker focused on M&A, working at Barclays and Credit Suisse. He also worked in derivatives and risk management while in banking.

Like many folks on Wall Street, Axler lost his banking job during the 2008 financial crisis.

He then set out to launch Spruce Point in 2009 because he saw an opportunity to invest in stocks following the crisis. It was a tough time to raise capital, especially without a track record.

He sort of fell into short selling, he told Business Insider. As he was searching for stocks to buy, he came across companies that didn't make any sense.

In particular, he started to take a close look at the Chinese reverse merger space. That is where a private Chinese company goes public in the US by merging with a US-listed shell company. At that time, there was a huge appetite for these kinds of deals.

Axler's first target was ZST Digital
A woman's umbrella turns inside out as she walks past the Nasdaq MarketSite during a snow storm in Times Square, Midtown New York
Thomson Reuters
Networks. After studying the company, he came to the conclusion that the financials weren't accurate. At the same time, the blogosphere was taking off and so was social media. He took to the internet and started writing about the company, sharing his findings.

In November 2010, Axler published a 20-page report on Seeking Alpha, SumZero, and his fund's own website describing a fraudulent business with numerous omissions and inaccuracies in its financial filings.

ZST voluntarily delisted from the Nasdaq and began trading on the pink sheets in April 2012.

He soon realized there were plenty of other companies he thought were inflating their financials.

"After this initial sort of experience trading/exposing stocks, I realized there was an opportunity to focus more on short selling, to be an activist in the space to raise the profile for short-sellers," he said.

How to spot a fraud

After targeting a couple of Chinese companies, his short activism took off. He then turned this attention to other corners of the market to look for fraud.

"Fraud is a global phenomenon," he said, noting that there are different "degrees" of it.

Planet Fitness
When searching for his targets, Axler, who has a master's in statistics from Yale, looks for outliers and things that look "too good to be true" when it comes to the numbers or the company's business model.

For example, with his most recent target, Planet Fitness, he finds it hard to buy the company's story that it will grow to 4,000 clubs. He called it an "arbitrarily chosen as a large figure to sell a fairytale," in his Harbor Investment Conference presentation.

He also looks into the managements' background and the people involved.

"At the end of the day, businesses are people. People are behind the operations and the numbers," he said. "I look to find managers of companies that have a history of value destruction and a behavior consistent with making bad decisions."

Right now, Axler thinks there's a lot of favorable shorts in the market.

"It's tougher to find undervalued securities six years into the recovery."